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Federal court strikes down PTIN fees, upholds PTINs

A federal district court held that the IRS has the authority to require tax return preparers to obtain preparer tax identification numbers (PTINs) but that it cannot charge a user fee for issuing PTINs (Steele, No: 14-cv-1523-RCL (D.D.C. 6/1/17)). The plaintiffs in the case, tax return preparers, brought a class action suit against the IRS claiming that the IRS lacks legal authority to require preparers to obtain PTINs and to charge a fee for issuing them.

The IRS originally began charging a user fee for issuing a PTIN in connection with its tax return preparer registration program, which required tax return preparers who were not CPAs, attorneys, or enrolled agents to pass an exam and register with the IRS. That program was invalidated in Loving, 742 F.3d 1013 (D.C. Cir. 2014).

Regarding the IRS’s authority to require the use of PTINs, the district court applied the standard of review of agency action found in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983). The court found that the IRS had the authority to require PTINs under Chevron because Sec. 6109(d) specifically and unambiguously gives the IRS the power to require the use of a PTIN. Further, as required by State Farm, the IRS’s decision to use PTINs was not arbitrary or capricious, the court held, because “[t]he IRS has articulated satisfactory explanations for its actions” (slip op. at 13).

The plaintiffs argued that the IRS could not charge PTIN fees because a PTIN is not a “service or thing of value,” which is required for agencies to validly impose fees (31 U.S.C. §9701). According to the Supreme Court, under the “service or thing of value” requirement, agencies may impose fees for bestowing on individuals special benefits not shared by the general public.

According to the court, because the court in Loving found that Congress did not authorize a license requirement for tax return preparers, there are no longer any restrictions on who may obtain a PTIN. As a result, there is no “special benefit” of being able to prepare tax returns for compensation (slip op. at 15). Therefore, PTINs are not a “service or thing of value” and the IRS cannot charge a fee for issuing them. In a separate order accompanying the opinion, the court ordered the IRS to "provide each class member with a full refund of all PTIN fees paid."

As a result of the decision, the IRS has suspended its PTIN registration and renewal system and, according to a message on its website, is working with the Justice Department to decide how to proceed.

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The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.

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